Counties grapple with alternative revenue as Sh50b target gets elusive
Counties are staring at huge pending bills by the end of the current financial year if checks are not in place to improve on revenue collection.
A report from the Controller of Budget for the first quarter of 2018-19 shows that the devolved units are supposed to collect Sh50 billion in own revenue sources (ORS) during the period to meet their financial needs.
The Sh50 billion forms part of the Sh450 billion the 47 counties need to facilitate their plans in the 2018-19 budget. Some of the counties needs are in development, which gobbles up to 39.5 per cent of the budget, and recurrent expenditure, which takes up to 60 per cent of the budget.
In order to finance the budget, county governments expect to receive Sh314 billion as an equitable share of revenue raised nationally, Sh25.5 billion in conditional grants from the National Government, Sh33.24 billion as conditional grants from Development Partners, and generate Sh50.06 billion from their own sources of revenue, and Sh48.36 billion cash balance from FY 2017/18.
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“A lot more needs to be done if counties are to achieve their financial targets in the current financial year. We have seen an improvement of above 50 per cent compared to a similar period in the 2017-18 financial year,” notes Controller of Budget Agnes Odhiambo.
“The improvement is however low compared to the annual target of Sh50 billion leaving the devolved units exposed to financial challenges,” she adds. “This is why we need more innovative ways to help the counties meet their collection targets.”
According to her, the counties had collected Sh7.41 billion, representing 14.8 per cent of the annual target of Sh50.06 billion during the first three months of the current financial year, an increase of 55 per cent from Sh4.82 billion realised in the same period of FY 2017/18.
In a phone interview, Kirinyaga Governor and former deputy chair Council of Governors Anne Waiguru says drastic solutions are needed to unlock revenue challenges facing the counties.
She says that current systems may not allow counties to collect enough revenue needed for development
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“The challenge we have in Kirinyaga, for instance, is the manual revenue collection system that we inherited from the previous regime, with challenges with the human resource team that is ageing and close to retirement. However, we are in the process of automating revenue collection and the hiring of 64 new revenue clerks to re-energise the team,” she says.
“As one of the options to be explored, I think counties should be allowed to borrow to cover their fiscal deficits using their county assets but within limits and with clear regulations anchored on the law to ensure, we do not burst the overall country’s debt ceiling.”
She believes counties should be allowed to use their existing assets to generate revenue but with clear regulations and approval processes.
“The relevant institutions should provide oversight.”
Besides development and recurrent expenditure, that the devolved units normally spend their budget allocations on, the counties will support President Uhuru’s Big Four Agenda, an additional task calling for governors to look for other sources of revenue to meet the needs.
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The Big Four agenda—manufacturing, Access to Healthcare, Food Security and Affordable Housing are aimed at uplifting the lives of citizens and are widely seen as part of President Uhuru Kenyatta’s legacy after two-term tenure.
Article 209 (3) of the Constitution allows county governments to generate own-source revenue from property rates, entertainment taxes and any other tax that is authorized by an Act of Parliament
The Constitution also allows county governments to borrow, but on condition that they get approval from the county assembly and the backing of the National government, which also acts a guarantor of the debt.
Debt instruments, such as bank loans or bonds, are usually attractive options to finance infrastructure projects.
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Laikipia County last year proposed a sale a Sh5billion-infrastructure bond to bridge a financing deficit.
Governor Ndiritu Muriithi said that the bond, to be floated at the Nairobi Securities Exchange this year, would finance major infrastructure projects of his government.
The plan makes it the first devolved unit to raise money from capital markets with Muriithi noting that they have commenced proper financial management reporting to meet The Treasury’s threshold of floating a bond.
“Counties are sub-sovereign and are stronger economic entities than municipalities. We expect that on basis of proper financial and economic management, the markets should consider the counties that are running proper economic that can support sub-sovereign debts,” said Muriithi.
The county intends to fund infrastructure projects such as road construction, water supply improvement, and power generation projects by governments and corporates. Tax incentives are normally given to woo investors buy the bonds.
The debt is to be sanctioned by Intergovernmental Budget and Economic Council and the National Treasury. This class of securities will ensure that the bond is attractive to investors.
Mr Kibe Mwangi, the Chief Executive Officer of ACAL, a consulting firm, says counties have the potential of generating own incomes if policies are created to allow governors to do things differently.
He notes that assets such as land carry greater potential in unlocking more revenue streams for the devolved units.
Strategic laws would see properties owned by either individuals or entities such as counties being developed by private investors and revenue shared up to a certain period. The investor would leave after recouping his money with the county reaping the advantage of developing an area cost-effectively.
“Alternative sources like bank loans and bonds are good avenues for counties to generate own income, but going by the current debt we have at the national level, it may not prove lucrative for most counties,” says Mr Mwangi.
“All counties have strategic assets that would attract big investors. Simpler models like Land Value Capture (LVC) are low lying fruits and sustainable. If adopted by our counties would help further generate more resources and reduce overreliance on the national government and conventional methods,” he adds.
The LVC mechanism allows cost-sharing on initial development stages of assets such as land, therefore, helping to reduce or re-distribute development activation costs.